Borrowing costs still cheap due to low inflation–BSP

Stable consumer prices and stiff competition for new clients have kept borrowing costs in the Philippines low despite tighter monetary settings implemented by regulators.

The Bangko Sentral ng Pilipinas (BSP) raised its key interest rates by 50 basis points last year. Reserve requirements for banks and special deposit account (SDA) rates were also raised to mop up excess liquidity from the economy.

Money, however, has remained relatively cheap, BSP Governor Amando M. Tetangco Jr. said.

In the past 12 months, actual bank lending rates have risen by 26.5 basis points, roughly half of the central bank’s own adjustment.

“Lower inflation expectations, together with increased competition, could serve to temper further increases in market rates,” Tetangco told the Inquirer.

The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable. This is done through interest rate adjustments and the management of the country’s money supply. Both influence domestic demand, which tempers or drives up the cost of goods in the country.

Benchmark overnight borrowing and lending rates were raised to 4 and 6 percent, respectively, by the BSP Monetary Board last year.

These adjustments were preemptive moves in anticipation of the US Federal Reserve’s expected rate hike this year. The BSP also hiked rates to combat the effects of drier weather due to the El Niño phenomenon.

Consumer price increases have remained tempered this year due to the slower-than-expected recovery in fuel prices in world markets.

“Since the time of the interest rate adjustments however, inflation expectations have also declined, mainly as a result of favorable supply-side factors,” Tetangco said.

Inflation data for September to be released on Tuesday may show consumer prices rising between 0.2 and 1 percent, a central bank forecast released last week showed. Banks polled by the Inquirer gave a median forecast of 0.6 percent, matching the record low achieved in August.